On The Fly: What to watch in Microsoft earnings report

Microsoft (MSFT) is scheduled to report results of its first quarter of fiscal 2017 after the market close on Thursday, October 20, with a conference call scheduled for 5:30 pm ET. What to watch for: 1. OFFICE 365 AND THE CLOUD: Under CEO Satya Nadella, Microsoft has invested heavily in cloud services, which has helped offset weakness in its personal computer businesses. Microsoft's "Intelligent Cloud" segment grew 7%, or 10% in constant currency terms, to $6.7B in the company's fourth quarter and the division made up nearly 30% of total revenue in fiscal 2016. The cloud has also recently dictated how the stock performs immediately following earnings, noted The Wall Street Journal's Steven Russolillo in an "Ahead of the Tape" column published yesterday. In April, when Microsoft's cloud business missed expectations, the stock saw a sharp pullback. In July, shares jumped over 5% to close at $55.91 on the day after the tech giant reported better than expected revenue and earnings and said its Azure revenue more than doubled compared to the same quarter of last year. Nomura analyst Frederick Grieb said in an earnings preview published last week that he expects Microsoft to report a "solid" Q1 driven by strong performance in Productivity and Business Process and Intelligent Cloud along with continued, single-digit declines in More Personal Computing results. Grieb, who believes the transition to Office 365 is above plan, declines in the Windows business have likely moderated and the company should continue to outperform on operating expenses, rates Microsoft a Buy with a $65 price target. Jefferies analyst John DiFucci, in his own earnings preview, said consensus revenue estimates "appear reasonable," noting they are almost 3% below typical sequential seasonality for this period of the year. Additionally, guidance should be achievable as consensus estimates expect sequential growth that is below the 3-year average of about 21% growth from Q1 to Q2, said DiFucci. He expects investors and management will focus on the continued transition to Office 365 in both the consumer and enterprise markets, along with other cloud businesses like Azure. DiFucci has an Underperform rating and $40 price target on Microsoft, as he has said several times in the past that he believe the company's transition to the cloud poses "ample risk" to both the top and bottom lines. 2. WINDOWS: Windows licensing falls within the company's "More Personal Computing" segment, which still represents the company's largest division in terms of revenue. Personal Computing revenue declined 4%, or 2% in constant currency, to $8.9B in Q1. Earlier this month, Microsoft announced plans for an event "to see what's next for Windows 10" scheduled for October 26. 3. UPDATE ON LINKEDIN DEAL CLOSING: Microsoft announced in June that it agreed to acquire LinkedIn (LNKD) for $196 per share in an all-cash deal valued at $26.2B, inclusive of LinkedIn's net cash. At that time, the companies said they expected that the transaction would close "this calendar year." Late last month, the New York Times reported that Salesforce (CRM), which had also showed interest in buying LinkedIn earlier this year, raised concerns with Europe's antitrust officials about Microsoft's deal. Following that report, the technology giant commented in an emailed statement to Bloomberg that the deal has already been cleared in the U.S., Canada and Brazil, adding that it is "committed" to price competition in the market.